Ericsson Faces Tough Economic Realities Head-on

Telecommunications-gear giant Ericsson was adversely affected economically in 2016 by slow capital spending on network upgrades and expansion among telecom carriers. Even though mobile data usage is growing exponentially that has not translated into wireless providers’ sales growth.

As a result, cost disciplines, albeit painful, have resulted in necessary budget cutting. However, cutting alone does not rebuild for the future; that also has to include additive revenues above and beyond current core competencies. To that point, Ericsson has announced that it plans for up to 25% of revenue to come from outside its traditional telecom operator customers by 2020.

We will illustrate how the company aims to achieve this through a key partnership with Cisco, providing support to the hyperscale cloud and stepping into alternative industries including utilities, transport and public safety. That means that IT organizations that do not typically see Ericsson may soon find themselves directly or indirectly impacted by the company. But first a little background.

Obviously, Ericsson is focusing a good deal of energy and attention on the upcoming move to next generation 5G (shorthand for 5th generation mobile networks or 5th generation wireless systems) standards. One of the many benefits of 5G will be to stream high-definition media even when users are out of reach of Wi-Fi hotspots. Another benefit will be for improving machine to machine communication of the Internet of Things (IoT), such as lowering cost and latency over what 4G equipment can provide.

However, 5G is not expected to be rolled out in scale until about 2020, and heavy market penetration of 5G services will probably not occur until 2022, but Ericsson does not have to depend upon future scenarios. It can continue to move forward with Long-Term Evolution (LTE for short), which is a current standard for high-speed wireless communication for mobile phones and data terminals in order to serve its current constituencies

Beyond its current core competencies, the company is moving forward on its own in such areas as IoT and the cloud, as well as through strategic partnerships, including a key relationship with Cisco.

Ericsson/Cisco: Synergy is in vogue again

The Cisco strategic partnership was announced by the companies in November 2015 and is essential for both. Ericsson brings strengths in wireless infrastructure equipment, managed services, and global presence and acceptance. Cisco’s strengths are in IP networking equipment, cybersecurity and enterprise and IT acceptance. Together, this spells end-to-end complete networking solutions (both wireless and wired) that is mostly highly complementary.

The partnership is also working because it recalls the use of the once overused termed “synergy” where the combination is greater than the efforts of either company working alone. For example, Ericsson bundles Cisco products in over 180 countries, significantly expanding Cisco’s geographical reach. Similarly, Cisco provides Ericsson access to key router markets, like China, where its major competitor Huawei is strong.

The companies’ strategic target in the first year focused on telecoms, but in 2017 their efforts are expected to extend to enterprises and the public sector. Overall, Ericsson and Cisco both expect to enjoy $1 billion or more in incremental revenues by 2018.

But the alliance is not only just about selling current products. More importantly, its focus is on what the future brings that is different from today, including the devices and sensors of IoT, the enterprise cloud, and eventually 5G. To that end, the companies are pooling engineering development resources in a collaboration to create SDN/NFV (Software Defined Networking/Network Functions Virtualization) capabilities. The goal is to leverage the partners’ complementary skills to accelerate customers’ digital transformations.

At the recent Ericsson Analyst Day in Boston, I asked a Cisco executive how he rated the partnership. Naturally, he was very supportive of the company’s extensive partner ecosystem. However, he did point out that Cisco has only two next generation partnerships: one with Ericsson and the other with Apple. That would seem to indicate the high regard in which Cisco holds Ericsson.

Hyperscale cloud is often associated with the Super 7 public cloud providers (Amazon/AWS, Facebook, Google, Microsoft, Baidu, Alibaba, and Tencent). Other commercial cloud suppliers, as well, as telecom cloud operators and enterprise IT clouds do not want only the Super 7 to offer hyperscale benefits. As a result, Ericsson provides a strong offering in this potentially large market (one that should help Ericsson meet its 2020 objective of 25% in non-traditional businesses).

The HDS 8000 (Hyperscale Data System 8000) is its hyperscale cloud entry in Ericsson’s Cloud System. It is built in collaboration with Intel on the Intel® Rack Scale Architecture. This architecture supports a disaggregated datacenter environment where pools of compute, storage, and networking resources can have their individual components (such as processors, hard drives, and switches) replaced independently as needed.

The whole rack acts as one large virtualized server with shared cooling and power. The components are connected using a fully optical interconnect using silicon photonics chipsets. The optical interconnect eliminates the traditional capacity and distance limitations that constrain electrical connections. The net result is the ability to more efficiently pool resources with the concomitant better resource utilization and lowered energy consumption. The HDS 8000 also contains the HDS Command Center, a management platform which also supports advanced analytics, automation, orchestration, and asset governance. This software-defined infrastructure efficiently controls resource pools based upon real-time analytics.

The bottom line of the HDS 8000 is what Ericsson calls “disruptive economics.” Lifecycle management and TCO (total cost of ownership) from traditional IT server architectures to resource pooling in a software-designed infrastructure. This breaks the traditional 3 to 5-year IT refresh cycle where entire systems had to be forcibly replaced, often highly disruptively.

Instead, individual components in each HDS 8000 resource pool (processing, storage and networking) can be upgraded and easily replaced without disrupting the whole. This extends the lifetime of the customer’s overall IT investment, since still useful components are not forcibly replaced, while at the same time enabling customers to take advantage of advancing technology. Lower TCO also results from less personnel investment in making upgrades, managing component failures and more efficient resource utilization than traditional architectures offer.

Ericsson beyond telecommunications

Ericsson is with no doubt a company in transformation. First from hardware to software and now from a single industry portfolio and sales to multiple industry portfolio and sales, including utilities, transport and public safety. Ericsson has great potential to create significant value across these industries due to its technology and services leadership, global scale, local presence and trust highly valued on the market. Ericsson strategy beyond Telco embraces 1) excel in focus industries mentioned above 2) expand with selected solutions across industries and 3) explore and establish new focus areas, all addressed through horizontal offerings in Network Infrastructure and Services, IT application, modernization and cloud infrastructure, digital business-critical systems, including security, IoT application platform and digital marketplace.

Mesabi musing

If an IT vendor is big enough and mature enough, it will eventually face economic challenges that it has to confront. The question is then how well it responds to often tough economic realities. The giant IT vendor community has had some successes (Dell and IBM come to mind), but also some well-known failures.

In our view, Ericsson will likely be counted among the successes, although its path may take longer than expected and not always offer a smooth ride. The company is well positioned to benefit from mobile communications’ great growth potential and IoT is still in its infancy. Ericsson’s partnership with Cisco fills in numerous product and market gaps, and also aids the ancillary (to Ericsson) trend of digital transformation. Finally, other efforts such as the hyperscale data center initiative and HDS 8000 solutions should lead to revenues outside its traditional base. Overall, Ericsson appears to be pursuing a well-balanced path that maximizes its existing qualities while developing the strength required to pursue new opportunities.